Nation: May Existing-Home Sales Show Modest Gain

Existing-home sales increased in May with buyers responding to lower home prices, according to the National Association of Realtors. Existing-home sales, including single-family, townhomes, condos and co-ops, increased 2.0 percent. NAR President Richard F. Gaylord of Long Beach, CA said buyers are seeing value in the current market. "Homebuyers are starting to get off the fence and into the market, drawn by drops in prices in many areas and armed with greater access to affordable mortgages." "Today's buyer plans to stay in a home for 10 years, which is a good strategy for building long-term wealth." NAR chief economist Lawrence Yun, "The large supply of homes on the market clearly favors buyers and it should take several months to draw the inventory down," "Stabilization in prices can only occur with buyers returning to the market, so we are encouraged by rising sales, particularly in distressed markets." Although conditions remain mixed around the country, unpublished data shows a number of areas are experiencing much higher sales activity than May a year ago, including Sacramento, San Fernando Valley and Monterey County CA, Sarasota Florida and Battle Creek Michigan.

Nation: Boomers Buy Now, Retire Later!

A buyer's market and favorable tax laws are motivating more baby boomers to buy now and retire later. Where are the hot spots? Near Water and Mountains. Minneapolis CPA Ronald Kelner's retirement is about 15 years away but he and his wife are renting out their future retirement home near Palm Springs. The Kelners are reaping the tax benefits and getting a step up on their peers that will flood the market in years to come. While most second-home purchases are for use now, the National Association of Realtors' survey shows that those born between 1946 and 1964 are more active buyers than any other group, owning 57 percent of all vacation homes and 58 percent of rental properties. the second-home market got a boost when tax laws changed in 1997, allowing owners to sell and get a $500,000 exemption from capital gains (for couples), as long as they lived in the property for two of the five years before the sale.

Metro: Market Continues Road To Recovery

The Saint Paul Area Association of Realtors reports that there were 4,418 more pending home sales during the month of May compared to 4.208 in April. However, that is a decline of 7.59 percent from the pending sales of May 2007. At the end of May, there were 33,229 active single-family residential listings in the 13-county metro and at the same time one year ago, there were 35,236 active listings. The 'months-supply of inventory' peaked in December of 07 at 14 and is a measure of the number of months it would take to sell the supply of inventory at the current pace of sales. "This is a sign that the housing market in the Twin Cities continues to recover even with the challenging economic factors of high oil prices and instability in the markets," said Greg Bauman, president of SPAAR. "the market continues to perform as expected and we will see continued stabilization for the 2nd half of 2008 and into the beginning of next year."

Vadnais Heights: Council Oks Townhouses Instead Of Senior Condos

The western half of the planned Arcade Estates apartments and condos for seniors, will instead become townhouses open to all age ranges. At last week's City Council meeting, developer Pat Goff's request to build 14 six-unit townhouses on his 8.5-acre site was approved. That's instead of the two three-story, 48-unit senior condos that were originally approved in 2005 on the west side of Arcade Street, just south of City Hall. According to Goff, the townhouses will be about 1,000 square feet with two bedrooms and a single-vehicle attached garage. Market value will be between $140,000 and $150,000.

Vadnais Heights: Council Oks Townhouses Instead Of Senior Condos

The western half of the planned Arcade Estates apartments and condos for seniors, will instead become townhouses open to all age ranges. At last week's City Council meeting, developer Pat Goff's request to build 14 six-unit townhouses on his 8.5-acre site was approved. That's instead of the two three-story, 48-unit senior condos that were originally approved in 2005 on the west side of Arcade Street, just south of City Hall. According to Goff, the townhouses will be about 1,000 square feet with two bedrooms and a single-vehicle attached garage. Market value will be between $140,000 and $150,000.

North Shore: Residential Property Values Could Jump With Great Lakes Clean-Up

A new study by researchers with the Brookings Institute claims Great Lakes cities stand to gain billions in economic benefits through lake restoration. The study says the city of Duluth alone would see property values skyrocket by 200-300-million dollars if the Great Lakes region's water quality was restored. A recent follow-up to a study released in 2007 estimates that it will cost 20-billion dollars to restore the Lakes, but the region would reap benefits valued at ten times that amount. The two larges cities on the Lakes, Chicago and Detroit, would see property values soar by up to seven-billion dollars.

The Housing Crisis Is Over

The dire headlines coming fast and furious in the financial and popular press suggest that the housing crisis is intensifying. Yet it is very likely that April 2008 will mark the bottom of the U.S. housing market. Yes, the housing market is bottoming right now.

How can this be? For starters, a bottom does not mean that prices are about to return to the heady days of 2005. That probably won't happen for another 15 years. It just means that the trend is no longer getting worse, which is the critical factor. . New home sales are down a staggering 63% from peak levels of 1.4 million. Housing starts have fallen more than 50% and, adjusted for population growth, are back to the trough levels of 1982.

Furthermore, residential construction is close to 15-year lows at 3.8% of GDP; by the fourth quarter of this year, it will probably hit the lowest level ever. So what's going to stop the housing decline? Very simply, the same thing that caused the bust: affordability.

The boom made housing unaffordable for many American families, especially first-time home buyers. During the 1990s and early 2000s, it took 19% of average monthly income to service a conforming mortgage on the average home purchased. By 2005 and 2006, it was absorbing 25% of monthly income. For first time buyers, it went from 29% of income to 37%. That just proved to be too much.

Prices got so high that people who intended to actually live in the houses they purchased (as opposed to speculators) stopped buying. This caused the bubble to burst.

Since then, house prices have fallen 10%-15%, while incomes have kept growing (albeit more slowly recently) and mortgage rates have come down 70 basis points from their highs. As a result, it now takes 19% of monthly income for the average home buyer, and 31% of monthly income for the first-time home buyer, to purchase a house. In other words, homes on average are back to being as affordable as during the best of times in the 1990s. Numerous households that had been priced out of the market can now afford to get in.

The next question is: Even if home sales pick up, how can home prices stop falling with so many houses vacant and unsold? The flip but true answer: because they always do.

In the past five major housing market corrections (and there were some big ones, such as in the early 1980s when home sales also fell by 50%-60% and prices fell 12%-15% in real terms), every time home sales bottomed, the pace of house-price declines halved within one or two months.

The explanation is that by the time home sales stop declining, inventories of unsold homes have usually already started falling in absolute terms and begin to peak out in "months of supply" terms. That's the case right now: New home inventories peaked at 598,000 homes in July 2006, and stand at 482,000 homes as of the end of March. This inventory is equivalent to 11 months of supply, a 25-year high – but it is similar to 1974, 1982 and 1991 levels, which saw a subsequent slowing in home-price declines within the next six months.

Inventories are declining because construction activity has been falling for such a long time that home completions are now just about undershooting new home sales. In a few months, completions of new homes for sale could be undershooting new home sales by 50,000-100,000 annually.

Inventories will drop even faster to 400,000 – or seven months of supply – by the end of 2008. This shift in inventories will have a significant impact on prices, although house prices won't stop falling entirely until inventories reach five months of supply sometime in 2009. A five-month supply has historically signaled tightness in the housing market.

Many pundits claim that house prices need to fall another 30% to bring them back in line with where they've been historically. This is usually based on an analysis of house prices adjusted for inflation: Real house prices are 30% above their 40-year, inflation-adjusted average, so they must fall 30%. This simplistic analysis is appealing on the surface, but is flawed for a variety of reasons.

Most importantly, it neglects the fact that a great majority of Americans buy their houses with mortgages. And if one buys a house with a mortgage, the most important factor in deciding what to pay for the house is how much of one's income is required to be able to make the mortgage payments on the house. Today the rate on a 30-year, fixed-rate mortgage is 5.7%. Back in 1981, the rate hit 18.5%. Comparing today's house prices to the 1970s or 1980s, when mortgage rates were stratospheric, is misguided and misleading.

This is all good news for the broader economy. The housing bust has been subtracting a full percentage point from GDP for almost two years now, which is very large for a sector that represents less than 5% of economic activity.

When the rate of house-price declines halves, there will be a wholesale shift in markets' perceptions. All of a sudden, the expected value of the collateral (i.e. houses) for much of the lending that went on for the past decade will change. Right now, when valuing the collateral, market participants including banks are extrapolating the current pace of house price declines for another two to three years; this has a significant impact on the amount of delinquencies, foreclosures and credit losses that lenders are expected to face.

More home sales and smaller price declines means fewer homeowners will be underwater on their mortgages. They will thus have less incentive to walk away and opt for foreclosure.

A milder house-price decline scenario could lead to increases in the market value of a lot of the securitized mortgages that have been responsible for $300 billion of write-downs in the past year. Even if write-backs do not occur, stabilizing collateral values will have a huge impact on the markets' perception of risk related to housing, the financial system, and the economy.

We are of course experiencing a serious housing bust, with serious economic consequences that are still unfolding. The odds are that the reverberations will lead to subtrend growth for a couple of years. Nonetheless, housing led us into this credit crisis and this recession. It is likely to lead us out. And that process is underway, right now.